Presentation is loading. Please wait.

Presentation is loading. Please wait.

Welcome. I am [Presenter Name], a [Presenter Title] with [Company]

Similar presentations


Presentation on theme: "Welcome. I am [Presenter Name], a [Presenter Title] with [Company]"— Presentation transcript:

1 Welcome. I am [Presenter Name], a [Presenter Title] with [Company]
Welcome. I am [Presenter Name], a [Presenter Title] with [Company]. Today we will examine an often overlooked principle of financial planning – the importance of asset location. Not FDIC/NCUA insured • May lose value • Not bank/CU guaranteed Not a deposit • Not insured by any federal agency

2 IMPORTANT DISCLOSURES
Before investing, investors should carefully consider the investment objectives, risks, charges, and expenses of the variable annuity and its underlying investment options. The current contract prospectus and underlying fund prospectuses, which are contained in the same document, provide this and other important information. Please contact your representative or the Company to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money. This material was prepared to support the promotion and marketing of Jackson® variable annuities. Jackson, its distributors and their respective representatives do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult your own independent advisor as to any tax, accounting, or legal statements made herein. Annuities are long-term, tax-deferred vehicles designed for retirement. Variable annuities involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity. Guarantees are backed by the claims-paying ability of the issuing insurance company. Tax deferral offers no additional value if an annuity is used to fund a qualified plan, such as a 401(k) or IRA. It also may not be available if the annuity is owned by a “non-natural person” such as a corporation or certain types of trusts. Although asset allocation among different asset categories generally limits risk and exposure to any one category, the risk remains that management may favor an asset category that performs poorly relative to the other asset categories. Other risks include general economic risk, geopolitical risk, commodity-price volatility, counterparty and settlement risk, currency risk, derivatives risk, emerging markets risk, foreign securities risk, high-yield bond exposure, noninvestment-grade bond exposure, index investing risk, industry concentration risk, leveraging risk, market risk, prepayment risk, liquidity risk, real estate investment risk, sector risk, short sales risk, temporary defensive positions, and large cash positions. Jackson is the marketing name for Jackson National Life Insurance Company® (Home Office: Lansing, Michigan) and Jackson National Life Insurance Company of New York® (Home Office: Purchase, New York). Jackson National Life Distributors LLC. OSJ: 7601 Technology Way, Denver, CO Phone: 800/ Before we begin, we would like you to hear some important disclosures. (Read slide.) For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

3 IMPORTANT DISCLOSURES
A message from the Florida Department of Financial Services An entity that is required to be licensed or registered with the Florida Office of Insurance Regulation but is operating without the proper authorization is identified as an unauthorized insurer. All persons have the responsibility of conducting reasonable research to ensure they are not writing policies or placing business with an unauthorized insurer. Any person who, directly or indirectly, aid or represent an unauthorized insurer can lose their licenses or face other disciplinary sanctions. Please see section , Florida Statutes, to read the laws. Lack of careful screening can result in significant financial loss to Florida consumers due to unpaid claims and/or theft of premiums. Under Florida law, a person can be charged with a third-degree felony and also held liable for any unpaid claims and refund of premiums when representing an unauthorized insurer. It is the person's responsibility to give fair and accurate information regarding the companies they represent. Note to presenter: This slide needs to be shown for presentations in Florida only. (Read slide.) For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

4 Gross Public Debt: Total Pct. GDP & Avg. Tax Rate
INTRODUCTION: Historical Tax Rates Gross Public Debt: Total Pct. GDP & Avg. Tax Rate Let’s begin by taking a look at this graph on historical tax rates. The gray area on this slide indicates the historical gross public debt as a percentage of GDP. As you can see, the United States currently is near an all-time high for total debt. The green line indicates the highest marginal tax rate over time, and the blue line indicates the average marginal tax rate over time. As you can see, in the past, when debt levels have increased, income tax rates have increased too. Currently, the United States has a very high historic debt level, but historically low income tax rates. The question I pose to you – how long will the historic low tax rates last? Sources: Tax Foundation, Tax Data, U.S. Federal Individual Income Tax Rates History, ; Treasury Direct, Historical Debt Outstanding – Annual ( ); U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Table, Table Gross Domestic Product ( ); The White House Office of Management and Budget, Historical Tables for Data includes actual historical data from and projected data from Sources: Tax Foundation, Tax Data, U.S. Federal Individual Income Tax Rates History, ; Treasury Direct, Historical Debt Outstanding – Annual ( ); U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Table, Table Gross Domestic Product ( ); The White House Office of Management and Budget, Historical Tables for Data includes actual historical data from and projected data from For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

5 INTRODUCTION: TAXES PAID
Adjusted Growth Income > $112,000 puts one in the top 10% But despite current low tax rates, over the last 20 years, the top 10% of taxpayers have seen their tax burden increase. In 1989, the top 10% paid 56% of all federal taxes. In 2009, the most recent year for which data is available, the top 10% paid 71%. To be considered part of the top 10%, a taxpayer must have an adjusted gross income of $112,000. Given that background, it’s also important to consider what the future may hold. Some taxpayers are already paying a larger percentage of the total federal tax bill For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

6 The Importance of Tax Planning
Why Taxes Will Rise in the End Source: David Leonhardt, The New York Times, July 12, 2011. We see newspaper headlines like the following. (Read headlines.) Source: David Leonhardt, The New York Times, July 12, 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

7 The Importance of Tax Planning
Why Taxes Will Rise in the End Taxes, Rising Rates Will Hit Rich in the Wallet, Experts Say Source: Investment News, June 5, 2011. (Read headline.) Source: Investment News, June 5, 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

8 The Importance of Tax Planning
Why Taxes Will Rise in the End Taxes, Rising Rates Will Hit Rich in the Wallet, Experts Say InvestmentNews.com, June 2011 Top Marginal Tax Rates May Skyrocket Source: Robert N. Gordon, Investment News, October 23, 2011. (Read headline.) Source: Robert N. Gordon, Investment News, October 23, 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

9 The Importance of Tax Planning
Why Taxes Will Rise in the End New York Times, July 2011 Taxes, Rising Rates Will Hit Rich in the Wallet, Experts Say InvestmentNews.com, June 2011 Higher Taxes are on the Horizon Source: Jeff Benjamin, Investment News, November 6, 2011. Top Marginal Tax Rates May Skyrocket (Read headline.) Source: Jeff Benjamin, Investment News, November 6, 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

10 The Importance of Tax Planning
Why Taxes Will Rise in the End New York Times, July 2011 Advisors, Beware of Sharp Tax Increase in 2013, Expert Says Source: Gil Weinreich, Advisor One, November 28, 2011. Taxes, Rising Rates Will Hit Rich in the Wallet, Experts Say InvestmentNews.com, June 2011 Higher Taxes are on the Horizon Top Marginal Tax Rates May Skyrocket (Read headline.) Source: Gil Weinreich, Advisor One, November 28, 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

11 The Importance of Tax Planning
Why Taxes Will Rise in the End New York Times, July 2011 Advisors, Beware of Sharp Tax Increase in 2013, Expert Says AdvisorOne.com, November 2011 Taxes, Rising Rates Will Hit Rich in the Wallet, Experts Say InvestmentNews.com, June 2011 State Taxes Rise Across the U.S. Source: Catherine Rampell, The New York Times, December 8, 2011. Higher Taxes are on the Horizon Top Marginal Tax Rates May Skyrocket (Read headline.) Source: Catherine Rampell, The New York Times, December 8, 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

12 The Importance of Tax Planning
Why Taxes Will Rise in the End New York Times, July 2011 Advisors, Beware of Sharp Tax Increase in 2013, Expert Says AdvisorOne.com, November 2011 Taxes will be the single greatest factor that separates people from their retirement dreams. Ed Slott Taxes, Rising Rates Will Hit Rich in the Wallet, Experts Say InvestmentNews.com, June 2011 “Over and over again Courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everyone does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands..." Judge Learned Hand, 2nd Circuit Court of Appeals State Taxes Rise Across the U.S. Higher Taxes are on the Horizon Top Marginal Tax Rates May Skyrocket Planning for the inevitable rise in tax rates is critically important. Your clients’ retirement dreams and legacy desires depend on it. And as this quote from Judge Hand unequivocally states – there is nothing wrong with engaging in proper tax planning to ensure your clients do not pay more than their legal obligation. Source: Legal Information Institute, Judge Learned Hand's comment in his dissenting opinion in Commissioner of Internal Revenue v. Newman, 159 F.2d 848, 850—851 (CA2 1947), data pulled June 21, 2012. Source: Legal Information Institute, Judge Learned Hand's comment in his dissenting opinion in Commissioner of Internal Revenue v. Newman, 159 F.2d 848, 850—851 (CA2 1947), data pulled June 21, 2012. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

13 Tax planning is an important consideration in:
THE IMPORTANCE OF TAX PLANNING Tax planning is an important consideration in: Wealth Accumulation Retirement Income Distributions Estate Planning Wealth Transfer Mistakes can be very costly You must understand the rules and plan accordingly Having an understanding of the current tax landscape can help you structure a comprehensive plan for your clients. Taxation will impact multiple facets of financial planning, including wealth accumulation, retirement income distributions, estate planning, and wealth transfers. Mistakes in these areas can be costly, so it is important to have a working knowledge of the rules. By doing so, you will have an opportunity to add value for your clients. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

14 The Changing Tax Environment Treatment of Common Investments
OVERVIEW The Changing Tax Environment Treatment of Common Investments Taxes and Investment Returns The Importance of Tax Deferral* Tax-Deferral Strategies Things to Remember About Asset Location In today’s presentation, we’ll cover several areas, including the changing tax environment and the tax treatment of common investment accounts; we’ll introduce the concept of tax drag and the importance of proper asset location as it relates to investment returns. Finally, we’ll focus on the importance of tax deferral and explore some specific tax-deferral strategies that you may find useful in advising your clients. * Tax deferral offers no additional value if an annuity is used to fund a qualified plan, such as 401(k) or IRA and may not be available if the annuity is owned by a “non-natural person” such as a corporation or certain types of trusts. * Tax deferral offers no additional value if an annuity is used to fund a qualified plan, such as 401(k)or IRA and may not be available if the annuity is owned by a “non-natural person” such as a corporation or certain types of trusts. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

15 the Changing Tax Environment
Expiration of the Bush Tax Cuts Higher Ordinary Income Tax Rates Highest rate in 2012: 35% Highest rate in 2013: 39.6% (43.4% including healthcare tax) Higher Capital Gains Tax Rates Long-term rate changing from 15% to 20% for individuals with taxable income above $400K for Single and $450K for MFJ 2012 Marginal Tax Rates $0 - $8,700 10% $8,701 - $35,350 15% $35,351 - $85,650 25% $85,651 - $178,650 28% $178,651 - $388,350 33% $388,351+ 35% 2013 Marginal Tax Rates $0-$8,925 10% $8,926-$36,250 15% $36,251-$87,850 25% $87,851-$183,250 28% $183,251-$398,350 33% $398,351-$400,000 35% $400,001+ 39.6% The Unemployment Insurance Reauthorization and Job Creation Act of 2010, signed by President Obama in December 2010, extended existing tax rates until December 31, 2012. On January 1st, 2013 the “American Taxpayer Relief Act of 2012” passed the Senate and House. This Act allows the Bush-era tax rates to sunset on individuals with taxable incomes above $400K for single and $450K MFJ. Ordinary income tax rates, capital gains rates, and qualified dividends increased on taxpayers subject to the sunset. The 39.6% tax bracket was reintroduced for taxpayers with taxable income of $400K for singles and $450K for MFJ. These taxpayers will also have the favorable 15% capital gains and qualified dividends under the Bush Tax Cuts expire and be subject to a 20% tax rate on LTCG and qualified dividends. The slide is our summarization of information from CCH Tax Briefing, American Taxpayer Relief Act of 2012, “President Signs Eleventh-Hour Agreement to Avert Fiscal Cliff,” January 2, 2013. The slide is our summarization of information from CCH Tax Briefing, American Taxpayer Relief Act of 2012, "President Signs Eleventh-Hour Agreement to Avert Fiscal Cliff," January 2, 2013. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

16 TREATMENT OF COMMON INVESTMENTS: Retirement Accounts
Income taxable every year at ordinary income or capital gains tax rates Brokerage accounts, mutual funds, CDs, SMAs (may offer a tax control feature – “tax harvesting”) Income taxable only when distributed, subject to ordinary income tax rates Qualified retirement plans, traditional IRAs, SEP IRAs, SIMPLE IRAs, 403(b)s, 457s, nonqualified annuities Taxable Accounts Tax-deferred Accounts The changing tax landscape makes it important to consider how your clients’ investment assets are allocated from a taxation standpoint. Investment accounts have a differing tax treatment, depending on which type of account, but there are essentially four different forms of tax treatment. (Read slide.) For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

17 TREATMENT OF COMMON INVESTMENTS: 4 Types of Tax Treatment
Exempt from tax at federal and/or state and local level Municipal bonds (exempt from federal tax and state/local tax if the owner resides in the state of issue) U.S. Treasuries (exempt at state and local level) Distributions not subject to taxation Roth IRAs qualified distributions Life insurance death benefits Tax-exempt Accounts Tax-free Accounts (Read slide.) For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

18 TREATMENT OF COMMON INVESTMENTS: MUTUAL FUNDS
Mutual Fund Taxation Shareholder tax liability arises in two ways Income realized by the mutual fund Capital gains distributions Long-term capital gains (taxed at preferential rate) Short-term capital gains (taxed at ordinary rates) Dividend distributions Qualified dividends (taxed up to 20%) Nonqualified dividends (taxed at ordinary rates) Capital gains realized by shareholders liquidating fund shares $200K for Singles and $250K for MFJ will also be subject to 3.8% Obamacare tax on net investment income However, it is also worth digging a little deeper to understand how taxable accounts are taxed, specifically mutual funds held in taxable accounts. Mutual fund shareholder tax liability arises in two distinct ways. First, any income realized by the fund is passed through by the fund to the shareholders. Income can be generated via capital gains distributions resulting from liquidation of assets by the fund manager. These capital gains will be passed through as long-term capital gains or short-term capital gains, depending on the length of time the fund held the liquidated asset. Funds can also pass through dividend income to fund shareholders. Secondly, mutual fund shareholder taxation arises when the shareholder liquidates their shares in the fund and realizes gains associated with the appreciation of those shares. This slide is our summarization of information from CCH Tax Briefing, American Taxpayer Relief Act of 2012, “President Signs Eleventh-Hour Agreement to Avert Fiscal Cliff,” January 2, 2013. This slide is our summarization of information from CCH Tax Briefing, American Taxpayer Relief Act of 2012, "President Signs Eleventh-Hour Agreement to Avert Fiscal Cliff," January 2, 2013. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

19 TREATMENT OF COMMON INVESTMENTS: MUTUAL FUNDS
Portfolio Turnover A measure of how frequently assets within a fund are bought and sold High turnover implies short holding periods which may result in STCG taxed at ordinary income rates High turnover increases transaction costs Average alternative mutual fund turnover is 185.8%1 Equity funds = 87.8% Tax-exempt income funds = 27.5% Taxable fixed income funds = 163.4% High turnover creates tax inefficiency There are additional issues regarding mutual fund taxation. As mentioned previously, the length of time the mutual fund holds a specific asset will dictate whether gains passed through to the shareholder are taxed as LTCG, which currently receive a preferential tax rate, or STCG, which are taxed at the taxpayer’s highest marginal income tax rate. A fund’s turnover ratio will identify how frequently the assets within a fund are bought and sold. Funds with high turnover ratios likely will pass more STCG through to shareholders than funds with low turnover ratios. Also worth noting, a fund with a high turnover ratio may also have higher transaction costs associated with buying and selling securities more frequently. Source: 1 Tom Roseen, Lipper Research Study, “Asset Location Strategies for the Taxable Investor,” December 2011. Source: 1 Tom Roseen, Lipper Research Study, "Asset Location Strategies for the Taxable Investor," December 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

20 TREATMENT OF COMMON INVESTMENTS: MUTUAL FUNDS
Phantom Income Income paid to a taxpayer during the tax year that is not constructively received at the taxpayer's year end but still results in income tax liability to the taxpayer Example1 Investor owns 10 shares of XYZ fund - $10/share. XYZ passes through a $2 short term capital gain. Assuming automatic reinvesting and fund distributions to pay taxes: Initial value: $10 x 10 shares = $100 STCG = $2 share x 10 shares = $20 reinvested NAV drops by distribution: $10 - $2 = $8 Reinvestment at $8/share: $20/$8 = 2.5 shares purchased New account value: 12.5 $8 = $100 $20 STCG taxed at 35% = $7 Investor has to pay $7 in income tax despite no actual gain on their investment An additional characteristic of mutual fund taxation results from phantom income taxation. Phantom income comes about when income is passed through to a fund shareholder without the shareholder constructively receiving a distribution. Despite not receiving a distribution from the fund, the shareholder will still have tax liability associated with the “phantom” distribution of income. Consider the following example. (Read example.) Source: 1 Tom Roseen, Lipper Research Study, “Asset Location Strategies for the Taxable Investor,” December 2011. Source: 1 Tom Roseen, Lipper Research Study, "Asset Location Strategies for the Taxable Investor," December 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

21 TREATMENT OF COMMON INVESTMENTS: MUTUAL FUNDS
Embedded Gains / Losses When fund shares are purchased, investors purchase the current embedded gains in the fund portfolio, even though they did not own the fund at the time the gains were earned. Shareholder purchases fund one day before ex-dividend and can have both long-term and short-term taxable distributions the next day. Embedded losses from 2008 have reduced tax liability for mutual fund investors over the last few years. The final tax characteristic of mutual funds worth exploring involves the notion of embedded gains and losses. (Read slide.) The information on this slide is our summarization of information from Tom Roseen, Lipper Research Study, “Asset Location Strategies for the Taxable Investor,” December 2011. The information on this slide is our summarization of information from Tom Roseen, Lipper Research Study, "Asset Location Strategies for the Taxable Investor," December 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

22 TREATMENT OF COMMON INVESTMENTS: MUTUAL FUNDS
The Impact of Tax Loss Carry Forwards With the steep losses witnessed in 2008 and the rapid market rise in 2009 and 2010, we cannot be sure of the longevity or magnitude of tax loss carry forwards in the near future. ...taxable investors and their advocates would do well to become more cognizant of the impact taxes have on fund returns. Speaking of tax loss carry forwards, let's review these quotes from Lipper. (Read Slide.) The losses experienced by the financial crisis have provided a silver lining to mutual fund investors from a taxation standpoint. With tax loss carry forwards, losses realized by the mutual funds can be carried forward to offset gains. How much tax loss carry forwards remain after strong market performance for the future remains to be seen. Source: Lipper Research Study, “Taxes in the Mutual Fund Industry,” April 2010. Source: Lipper Research Study, "Taxes in the Mutual Fund Industry," April 2010. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

23 TAXES AND INVESTMENT RETURNS: TAX DRAG
Reduced investment return resulting from taxation Alternative investments have notoriously high tax drag Alternative Funds Tax Drag Precious Metal Funds 2.93% Real Estate Funds 1.96% Global Real Estate Funds 1.71% Absolute Return Funds 1.57% Global Flexible Portfolio Funds International Real Estate Funds 1.55% Flexible Portfolio Funds 1.12% Long/Short Equity Funds 1.02% Equity Market Neutral Funds 0.72% The negative impact of taxes on investment returns is also known as tax drag. Alternative investment funds are notoriously tax inefficient and typically have high tax drag. For example, consider these alternative funds. (Read Slide.) As you can see, with mutual fund taxation, taxable investors will have tax drag, whether they want it or not. Taxation is not always triggered by liquidation of shares. Source: Tom Roseen, Lipper Research Study, “Asset Location Strategies for the Taxable Investor,” December 2011. Source: Tom Roseen, Lipper Research Study, “Asset Location Strategies for the Taxable Investor,” December 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

24 TAXES AND INVESTMENT RETURNS: TAX DRAG
Taxable investors gave up % in annual returns due to taxes in alternative mutual funds. In years when tax loss carry forwards were not so prevalent, tax drag on equity funds was as high as 2.5-3% annually. Funds that have high portfolio turnover or other tax-inefficient characteristics are best located in tax-advantaged accounts. If we look at the impact of tax drag on specific fund performance, we’ll see that some funds have performed worse than others. For example, the tax drag on taxable fixed income funds reduced returns by 1.84%, while equity mutual funds saw a reduction in returns of 0.93%. Alternative mutual funds fell in between, seeing their annualized returns reduced 1.37% due to taxes. Funds that pass through regular taxable income distributions, or that have large amounts of portfolio turnover or other tax-inefficient behaviors, would be best located in tax-advantageous vehicles such as IRAs, 401(k)s, and variable annuities – especially when you consider how lower returns due to tax drag can have an impact on an investor achieving their retirement goals. The information on this slide is our summarization of information from Tom Roseen, Lipper Research Study, “Asset Location Strategies for the Taxable Investor,” December 2011. The information on this slide is our summarization of information from Tom Roseen, Lipper Research Study, "Asset Location Strategies for the Taxable Investor," December 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

25 TAXES AND INVESTMENT RETURNS: TAX DRAG
How Long Will it Take Your Investment to Double? The Rule of "72" Let’s delve deeper into how tax drag can have a detrimental impact on your clients’ attainment of their retirement goals. I’m sure you’ve all heard of the Rule of 72, which states that in order to find the number of years required to double your money at a given interest rate, you divide the compound rate into the number 72. In this scenario, a portfolio yielding a 9% return will double in 8 years, while a portfolio with a lower return of 6% will double in 12 years. However, you may not be as familiar with the rule of , which states that while the rule of 72 will reveal the length of time required to double your money, it will take 50% longer if an investor is in a combined federal and state income tax bracket of 33%. So, as we can see on the slide, a 9% return will take nearly 12 years to double, while a 6% return will double an account’s value in 18 years. The impact of 9% and 6% return may seem miniscule, but when considering the impact on increasing the value of one’s retirement portfolio using the rule of 72 and even more so by using the rule of , we can see maximizing returns by minimizing the impact of taxation of returns is critically important. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

26 TAXES AND INVESTMENT RETURNS: ASSET LOCATION
Asset allocation is widely utilized in retirement planning Asset location is equally important Goal: divide assets among taxable and taxed-advantaged accounts to defer taxes and gain the best after-tax wealth for the portfolio. Tax efficient assets often held in taxable account Tax inefficient assets often held in tax-deferred accounts Crucial to wealth accumulation over an investor’s lifetime While the notion of asset allocation is a fundamental tenet and a widely held belief of a sound investing philosophy, the concept of asset location is not as widely known. Proper asset location has the goal of reducing the tax burden of owning financial assets while maintaining an optimally diversified portfolio. In creating the optimal portfolio and attempting to maximize returns, careful consideration must be paid to directing certain types of assets into certain types of accounts. Typically, tax efficient assets often are held in taxable accounts and tax inefficient assets are held in tax-deferred accounts. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

27 TAXES AND INVESTMENT RETURNS: ASSET LOCATION
Tax-deferred investing can be valuable because: It allows investors to earn the pre-tax return on assets. Pre-tax returns can compound over time. The value of tax-deferred investing depends on which assets are held in tax-deferred accounts. Tax-deferred investing is valuable because: (Read Slide.) For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

28 THE IMPORTANCE OF TAX DEFERRAL
For representative use only. Not for public distribution. THE IMPORTANCE OF TAX DEFERRAL Tax Deferral Allows growth to compound faster than currently taxable investments Gives client control over when to recognize taxable income Provides a tax shelter for tax-inefficient assets As you can see in the graph, tax deferral allows the value of an asset to appreciate more quickly over time than currently taxable investments. A tax-deferred wrapper gives clients the choice when to recognize taxable income, depending on when they take a withdrawal. Most importantly, for assets that are considered tax inefficient and would create a hefty tax liability if held in a taxable account, tax-deferral can permit ownership of these types of assets in a more tax-favored wrapper allowing for growth maximization. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

29 THE IMPORTANCE OF TAX DEFERRAL
Tax deferral is especially important for tax-inefficient assets. Bond funds, REITs, alternative investments, and actively managed investments tend to be tax inefficient. By placing tax-inefficient assets in tax-deferred accounts, returns potentially can increase by as much as 100 basis points without increasing risk. Tax deferral can be particularly important for tax-inefficient assets like bond funds, REITs, alternative investments, and other actively managed investments. By utilizing asset location and placing tax-inefficient assets in tax-deferred accounts, research shows that returns potentially can increase by as much as 100 basis points, without any increase in risk. Source: Laurence P. Greenberg, LifeHealthPro, “Estate Planning With Annuities,” October 1, 2011. Source: Laurence P. Greenberg, LifeHealthPro, "Estate Planning With Annuities," October 1, 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

30 Remaining Cost Basis: $90,000
The IMPORTANCE OF TAX DEFERRAL: ANNUITY DISTRIBUTION Taxation of Withdrawals Distributions consist of gain first Gains are taxed at ordinary income tax rates If gains have been depleted, then cost basis is returned tax free Gain is determined at the time of withdrawal $30,000 Distribution Gain: $20,000 Cost Basis: $100,000 Gain: $20,000 Tax Free: $10,000 Remaining Cost Basis: $90,000 Tax-deferred annuities, commonly used to accumulate retirement assets after clients have maximized contributions to qualified retirement plans and IRAs, are often used as tax-deferred investment vehicles. It’s important to note, however, that while the growth in these accounts is tax deferred, there are tax implications when taking distributions. (Read slide.) $100,000: Cost Basis For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

31 The IMPORTANCE OF TAX DEFERRAL: ANNUITY DISTRIBUTION
Blended Tax Rates Ordinary income tax treatment is often cited as a disadvantage No one actually pays taxes at the marginal tax rate Progressive tax system blends rates $100k AGI is in the 25% marginal bracket (filing jointly) but effective tax rate is less than 17% $100,000 - $72,500 = $27,500 * 25% = $6,875 + $9,983 = $16,658 $16,658/$100,000 = 16.7% 25% Marginal Rate Effective Tax Rates 39.6% Cap 13.8%-19.4% Blended Tax Rate While gains in annuity contracts when distributed are taxed at ordinary income tax rates, there is a common misperception that these distributions are taxed at the client’s highest marginal tax rate, and thus ordinary income tax treatment of annuity distributions is often cited as a disadvantage of investing in these types of accounts. In reality, we have a progressive tax system which blends tax rates. If a taxpayer falls in the 25% marginal tax rate, in reality, they will pay between 13.8% and 19.4% in taxation – substantially less than 25%. For example, a taxpayer with AGI of $100,000 falls within the 25% tax bracket. That taxpayer doesn’t pay $25,000 in taxes; for the income that falls within the lower tax brackets, the taxpayer will pay a lower rate making the blended effective tax rate less than 17%. Given this backdrop, let’s explore a few advanced planning strategies that highlight the importance of tax deferral. This slide is our summarization of information from IRS document Rev. Proc This slide is our summarization of information from IRS document Rev. Proc For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

32 Tax-Deferral Strategies: Healthcare
Tax Deferral and Healthcare Reform Healthcare Reform - Penalty Taxes for High-Income Earners. 3.8% on Net Investment Income starting in 2013. $200k+ for Singles. $250k+ for Married. Net Investment Income Includes: Capital gains, annuity income, interest, rents, royalties... Does not include distributions from qualified plans, IRAs, Simples, SEPs, and Roth IRAs. Top rate projected to be 43.4% Tax deferral can have advantages not only in growing wealth, as we saw before, but also in protecting that growth from additional taxes, for example, the new tax created by the Patient Protection and Affordable Care Act. This new tax will impose a 3.8% surtax on net investment income for taxpayers exceeding a certain threshold of income. “Net investment income” includes capital gains, annuity distributions, interests, and other forms of nonqualified investment gains. The NII tax will not be imposed on distributions from qualified plans and IRAs, however, distributions from these types of accounts will likely increase the taxpayer’s AGI, potentially exposing the taxpayer to NII on their other investment distributions. Given the NII tax of 3.8% and the top tax rate of 39.6%, the total tax rate an investor could pay exceeds 43%! Tax-deferred growth inside a deferred annuity contract will not be considered as income or net investment income for the purpose of the healthcare surtax. Source: Congressional Healthcare Caucus, Healthcare Reconciliation Act of 2010, “New 3.8% Medicare Tax on 'Unearned' Net Investment Income.” Source: Congressional Healthcare Caucus, Healthcare Reconciliation Act of 2010, "New 3.8% Medicare Tax on 'Unearned' Net Investment Income." For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

33 Deferred Annuities and Non-natural Owners
TAX-DEFERRAL STRATEGIES: TRUST FUNDING Deferred Annuities and Non-natural Owners Trust taxation may expose low amounts of income to high tax rates 2013 Single 0 - $8,925 10% $8, $36,250 15% $36,251 - $87,850 25% $87,851 - $183,250 28% $183,251 - $398,350 33% $398,351 - $400,000 35% $400,001+ 39.6% 2013 Trust Tax Rates $0 - $2,450 15% $2,451 - $5,700 25% $5,701 - $8,750 28% $8,751 - $11,950 33% $11,951+ 39.6% We’ve discussed the importance of tax deferral at the individual level, but let’s explore tax deferral in the context of non-natural owners, like trusts. As you can see, compared to individual tax rates, trust tax rates are extremely compressed, meaning that the highest tax rates are triggered on low levels of income. This slide is our summarization of information from IRS document Rev. Proc This slide is our summarization of information from IRS document Rev. Proc For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

34 Deferred Annuities and Non-natural Owners
Tax-deferral Strategies: Trust Funding Deferred Annuities and Non-natural Owners Non-natural owners generally do not receive tax deferral under IRC 72(u). Owners that lose tax deferral include businesses, corporations, partnerships, charities, CRTs, foundations, endowments, and municipalities. EXCEPTION: Trusts that are acting as an agent for a natural person will receive tax deferral. The IRS allows for tax deferral when annuities are owned by individuals, however, when an annuity is owned by something other than an individual, referred to as a non-natural owner, the annuity will lose its tax-deferred status, with one exception. If an annuity is owned by a trust, and the trust is serving as an agent for a natural person, the annuity will qualify for tax deferral. This slide is our summarization of information from Cornell University Law School, Internal Revenue Code 72 (u), data pulled June 20, 2012. This slide is our summarization of information from Cornell University Law School, Internal Revenue Code 72 (u), data pulled June 20, 2012. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

35 TAX-DEFERRAL STRATEGIES: TRUST FUNDING
“Pass-In-Kind” Titling Annuity 1 Owner: Trust Annuitant: Andy Beneficiary: Trust Annuity 2 Annuitant: Ben Annuity 3 Annuitant: Cathy Owner: Andy Owner: Ben Owner: Cathy At the trustee’s request, these annuities are passed “in kind” to the beneficiaries. Ownership is changed to the beneficial owner without triggering a taxable event. Any annuity benefits that have accrued during trust ownership continue after the ownership change. Consider the following example showing why an annuity inside a trust, and the resulting tax-deferred growth, can be so compelling. Assume you have a bypass trust created to benefit a surviving spouse, and upon the spouse’s demise, the assets are intended to be distributed to the trust beneficiaries – the kids. By utilizing an annuity, there is an opportunity to leverage tax deferral for multiple generations to maximize the wealth transfer opportunity. The pass-in-kind strategy allows the annuity contract to be retitled upon dissolution of the trust without triggering a taxable event. The IRS has ruled that (1) the annuity IS deemed to be owned by a natural person for purposes of Section 72(u) and, (2) upon dissolution of the trust, the distribution of the annuity contracts to the named beneficiaries is NOT a taxable event. PLR supports the proposition that an annuity can be an excellent vehicle to provide for continued growth on a tax-deferred basis. It also allows the beneficiaries to continue to enjoy the many benefits of the annuity long after the trust is terminated. Each beneficiary can continue to own his or her own annuity contract and get simplified asset management, income tax deferral, and tax-free exchanges of investment portfolios. Furthermore, the new account owner can name new beneficiaries on the policy, thus allowing for the assets to be passed to the next generation in a tax-efficient manner via nonqualified stretch. It is important to have proper titling for pass-in-kind strategy. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

36 Buy and hold…for a while
TAX-DEFERRAL STRATEGIES: Tax-free Exchanges Buy and hold…for a while The average holding period for mutual funds is 3.29 years1 Liquidation of mutual funds creates a taxable event Deferred annuities can be 1035 exchanged for another annuity contract allowing growth to remain tax deferred Annuity subaccounts can be rebalanced without taxes or transaction costs Investors have the ability to make changes to their holdings and preserve the tax-deferred treatment. (Read Slide.) Source: 1 Dalbar, Inc., Quantitative Analysis of Investor Behavior, April 2012. Source: 1 Dalbar, Inc., Quantitative Analysis of Investor Behavior, April 2012. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

37 How Are Death Benefits Taxed?
TAX-DEFERRAL STRATEGIES: Taxation of Death Benefits How Are Death Benefits Taxed? No step-up in cost basis Full death benefit value includable in taxable estate Death benefit paid out in excess of basis is taxable as ordinary income Death Benefit Paid Remaining Cost Basis Taxable Amount When planning your legacy, it is important to know how death benefits are taxed. (Review slide.) For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

38 TAX-DEFERRAL STRATEGIES: IRD
Step 1 Step 2 Step 3 Calculate estate tax Gross estate $6,000,000 Adj. tax estate Take out IRD items and recalculate estate tax Gross estate $6,000,000 Adj. tax estate Less: IRD assets - $500,000 Adj. taxable estate without IRD $5,500,000 Calculate IRD tax deduction Fed estate tax $300,000 Fed estate tax without IRD items - $100,000 Tax attributable to IRD $200,000 deduction 40% $2,345,800 Less unified credit - $2,045,800 Fed estate tax $300,000 40% $2,145,800 Less unified credit - $2,045,800 Fed estate tax $100,000 (IRD) is income that is payable after the death of the person who was entitled to it and that would have been taxable to him/her if the person had lived to receive it. If the estate is large enough to pay an estate tax, the IRD items are taxed twice: once via the estate tax, a tax on the transfer of property at death, and once via the income tax, a tax on the receipt of income. The beneficiary must pay the income tax as distributions are taken from the inherited account. While the taxes are due upon such distributions, there is a deduction for the estate taxes paid that may create sizeable tax reductions for the beneficiaries – this is known as the IRD deduction. Step 1: Calculate the estate tax due including the IRD asset. Step 2: Calculate the estate tax due without the IRD asset. Step 3: Determine the difference, and this is the IRD deduction. Let’s look at a simplified example. Harry died in 2013 with the following assets: A home valued at $2 million, a NQ brokerage account valued at $3M, and a nonqualified annuity of $1 million (with $500k in gains – which is our IRD asset). Sam, Harry’s son, is the sole beneficiary of Harry’s estate. The American Taxpayer Relief Act provides for a maximum estate tax rate of 40% with a $5.25M exclusion, adjusted for inflation each tax year. It’s important to note that IRD is a deduction available to the beneficiary, not a credit (like the unified credit for estate tax purposes). (Read slide.) This slide is our summarization of information from the Internal Revenue Service Publication 950, “Introduction to Estate and Gift Taxes,” November 21, 2011; The Internal Revenue Code Section 691 “Recipients of Income in Respect of Decedents,” 2012; P.L (The 2010 Tax Act); P.L , EGTRRA; IRS document Rev. Proc This slide is our summarization of information from the Internal Revenue Service Publication 950, “Introduction to Estate and Gift Taxes,” November 21, 2011; The Internal Revenue Code Section 691 “Recipients of Income in Respect of Decedents,” 2012; P.L (The 2010 Tax Act); P.L , EGTRRA; IRS document Rev. Proc For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

39 TAX-DEFERRAL STRATEGIES: STRETCH
Nonqualified Stretch Provides clients with a simple legacy planning tool Allows beneficiaries to pay taxes on only required distributions Continues to grow tax deferred IRD can be used to offset income taxes owed on distributions Creates opportunity to educate beneficiaries and retain assets on your book Provides a platform to control spendthrift beneficiaries Annuity owners get the benefit of tax deferral while alive, and non-spousal beneficiaries can still leverage the power of tax deferral after inheriting a nonqualified annuity contract. Similar to a stretch IRA, a nonqualified stretch distribution allows a non-spousal beneficiary the option of avoiding taxation on a lump sum death benefit by choosing to distribute the death benefit over the beneficiary’s life expectancy. (Read Slide.) For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

40 THINGS TO REMEMBER ABOUT ASSET LOCATION
GOAL: Reduce the tax burden while maintaining an optimally diversified portfolio. Portfolio turnover, tax drag, phantom income, and embedded gains can all have an impact on returns Tax deferral and beyond: IRD, non-natural ownership taxation, pass-in-kind strategy, and stretch distributions Research shows that simply by locating assets based on their tax treatment (taxable vs. tax-deferred), tax deferral can potentially increase returns by as much as 100 basis points1 (Read slide.) Source: 1 Laurence P. Greenberg, LifeHealthPro, “Estate Planning With Annuities,” October 1, 2011. Source: 1 Laurence P. Greenberg, LifeHealthPro, “Estate Planning With Annuities,” October 1, 2011. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

41 Thank You Thank you for your time. We hope that you found this information on tax treatment and tax deferral useful and that you gained some strategies in working with clients. We also hope you learned some new things about the tax environment, common investments, and investment returns. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

42 IMPORTANT DISCLOSURES
Before investing, investors should carefully consider the investment objectives, risks, charges, and expenses of the variable annuity and its underlying investment options. The current contract prospectus and underlying fund prospectuses, which are contained in the same document, provide this and other important information. Please contact your representative or the Company to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money. This material was prepared to support the promotion and marketing of Jackson® variable annuities. Jackson, its distributors and their respective representatives do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult your own independent advisor as to any tax, accounting, or legal statements made herein. Annuities are long-term, tax-deferred vehicles designed for retirement. Variable annuities involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity. Guarantees are backed by the claims-paying ability of the issuing insurance company. Tax deferral offers no additional value if an annuity is used to fund a qualified plan, such as a 401(k) or IRA. It also may not be available if the annuity is owned by a “non-natural person” such as a corporation or certain types of trusts. Although asset allocation among different asset categories generally limits risk and exposure to any one category, the risk remains that management may favor an asset category that performs poorly relative to the other asset categories. Other risks include general economic risk, geopolitical risk, commodity-price volatility, counterparty and settlement risk, currency risk, derivatives risk, emerging markets risk, foreign securities risk, high-yield bond exposure, noninvestment-grade bond exposure, index investing risk, industry concentration risk, leveraging risk, market risk, prepayment risk, liquidity risk, real estate investment risk, sector risk, short sales risk, temporary defensive positions, and large cash positions. Jackson is the marketing name for Jackson National Life Insurance Company® (Home Office: Lansing, Michigan) and Jackson National Life Insurance Company of New York® (Home Office: Purchase, New York). Jackson National Life Distributors LLC. OSJ: 7601 Technology Way, Denver, CO Phone: 800/ We took time at the beginning of this presentation to go over this information. Because it is important, we wanted to review it again. (Read slide.) As required by the IRS, you are advised that any discussion of tax issues in this material is not intended or written to be used, and cannot be used, (a) to avoid penalties imposed under the Internal Revenue Code or (b) to promote, market or recommend to another party any transaction or matter addressed herein. For an audience with a basic understanding of the financial industry. Not intended for use with the general public.

43


Download ppt "Welcome. I am [Presenter Name], a [Presenter Title] with [Company]"

Similar presentations


Ads by Google